Japanese households return to Dalal Street

Just two years after India’s policymakers stared down a major capital flight threat, the country has become a hot emerging market investment destination for one of the world’s most robust sources of capital — Japanese households.

Japanese retail investors chasing higher yields and resilient assets will provide Indian corporates another source of capital at a time of when capital inflows are peaking ahead of a widely-expected US interest rate rise.

Fund managers say the increased interest from Japanese investors is also a vote of confidence in the fiscal and market reforms of Prime Minister Narendra Modi, voted into office in May 2014.

The reforms that have opened up India’s markets to foreigners were game changers for the so-called “Mrs Watanabe” — Japanese retail investors driven by their country’s policy of zero interest rates to seek yield offshore. Japanese retail investment into India through investment trusts in October was 462 billion yen ($3.76 billion), its highest level in 7.5 years and more than doubling the amount invested at the time Modi came to power. That’s in stark contrast to markets such as Brazil that have experienced heavy outflows from Japanese investors.

“People realised something big had happened and money flew into equity funds and so on,” Ai Fujiwara, senior fund manager at Eastspring Investments in Tokyo, said of Mr Modi’s election.

“And now as India is starting to look better compared to other emerging countries, there’s a renewed focus on it.”

Japanese retail investors have pumped $1.8 billion into funds investing in Indian bonds in the first nine months of the year, compared with $489.6 million a year earlier, and hold a total $2.3 billion of bonds, data from Thomson Reuters Lipper shows.

Japanese investors have historically favoured destinations such as Brazil and Turkey for growth. But with India now bringing inflation under control and posting among the fastest emerging markets economic growth rates, fund flow direction has shifted toward the subcontinent.